Lower PF contribution to provide short-term relief to employees with higher salary

Finance Minister Nirmala Sitharaman has announced the Mega Fiscal Stimulus package to combat the ill effect on economy and livelihood of the lockdown imposed to contain the spread of COVID-19.

As part of the Mega Fiscal Stimulus package announced by Finance Minister Nirmala Sitharaman to combat the ill effect on economy and livelihood of the lockdown imposed to contain the spread of highly contagious Novel Coronavirus COVID-19, one of the significant areas of relief is with respect to Provident Fund (PF) contribution both for the employers and employees.

As per the stimulus, for employees having basic salary of more than Rs 15,000 a month, both the employee and employer would contribute 10 per cent of the salary instead of the mandatory 12 per cent contribution towards the PF for the next three months till August 2020.

“This would provide relief to about 6.5 lakh establishments covered under EPFO (Employees’ Provident Fund Organisation) and about 43 crore such employees,” said Dr. (CA) Suresh Surana, Founder, RSM India, adding, “This will provide liquidity of Rs 6,750 crore to employers and employees over the next 3 months.”

Point to be noted is that PF is mandatory for employees with basic salary of up to Rs 15,000 per month in the organisations having 20 or more employees, while it is optional for such an organisation to extend the benefit to employees with higher salary.

Dr. Surana also mentioned that, under the earlier Pradhan Mantri Garib Kalyan Package, the government had proposed to contribute 24 per cent (employers’ and employees’ contribution) into the Employees Provident Fund (EPF) for 3 months (March, April and May 2020) in case of employees drawing salary of less than Rs 15,000 per month and working in organisations having less than 100 employees and where 90 per cent of the employees draw salary of less than Rs 15,000 per month.

“This relief has been further extended for the next 3 months i.e. June, July and August 2020 and the government would continue to contribute 24 per cent to the EPF accounts of such employees. While this was a welcome relief, its applicability was limited to very few businesses due to the above conditions,” said Dr. Surana.

“This would provide much relief to the employers who will have direct savings on this account and employees. The increased cash flow will boost consumption and this is a truly win-win situation for all – employers, employees and government,” Dr. Surana added.

While stimulus measure would provide short-term relief to the employees with basis salary of over Rs 15,000 per month through increased liquidity, but the 4 per cent (2 per cent from the employee and 2 per cent from the employer) lower contribution to the EPF account would dent the long-term goal of accumulation of retirement corpus a bit.

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